SOLUTION MANUAL For Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, Verified Chapters 1 - 21, Complete Newest Version SOLUTION MANUAL For Foundations of Financial Management, 18th Edition by Stanley Block, Geoffrey Hirt, Verified Chapters 1 - 21, Complete Newest V...
SOLUTION MANUAL for Foundations of Financial Managemen
18th Edition by Stanley Block, Geoffrey Hir
Chapters 1 – 21, Complet
,
, Chapter1 cs
The Goals and Functions of Financial Management
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Discussion Questions sc
1-1 What effect did the recession of 2007-2009 have on government regulation?
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It was greatly increased.
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1-2 What advantages does a sole proprietorship offer? What is a major drawback of this type of organization?
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A sole proprietorship offers the advantage of simplicity of decision making and low organizational and o
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perating costs. A major drawback is that there is unlimited liability to the owner.
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1-3 What form of partnership allows some of the investors to limit their liability? Explain briefly.
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A limited partnership allows some of the partners to limit their liability. Under this arrangement, one or
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more partners are designated general partners and have unlimited liability for the debts of the firm; othe
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r partners are designated limited partners and are liable only for their initial contribution. The limited pa
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rtners are normally prohibited from being active in the management of the firm.
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1-4 In a corporation, what group has the ultimate responsibilityfor protecting and managing the stockhold
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ers’ interests? sc
The board of directors. sc sc sc
1-5 What document is necessary to form a corporation?
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The articles of incorporation.
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1-6 What issue does agency theory examine? Whyis it important in a public corporation rather than in
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a private corporation?
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, Agency theory examines the relationship between the owners of the firm and the managers of the firm. I
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n privately owned firms, management and the owners are usually the same people. Management operate
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s the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves from pr
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ivate to public ownership, management now represents all owners. This places management in the agen
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cy position of making decisions in the best interest of all shareholders.
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1-7 What are institutional investors important in today’s business world?
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Because institutional investors such as pension funds and mutual funds own a large percentage of major U.
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S. companies, they are having more to say about the way publicly owned companies are managed. As a gro
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up, they have the ability to vote large blocks of shares for the election of a board of directors, which is supp
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osed to run the company in an efficient, competitive manner. The threat of being able to replace poor perf
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orming boards of directors makes institutional investors quite influential. Since these institutions, like pe
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nsion funds and mutual funds, represent individual workers and investors, they have a responsibility to se
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e that the firm is managed in an efficient and ethical way.
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1-8 Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximizatio
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n of shareholder wealth?
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The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefi
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ts is not considered, and profit measurement is a very inexact process. The goal of shareholders’ wealth
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maximization implies that the firm will attempt to achieve the highest possible total valuation in the mar sc sc sc sc sc sc sc sc sc sc sc sc sc sc sc sc
ketplace. It is the one overriding objective of the firm and should influence every decision.
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1-9 When does insider trading occur? What government agency is responsible for protecting against the un
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ethical practice of insider trading? sc sc sc sc
Insider trading occurs when anyone with non- sc sc sc sc sc sc
public information buys or sells securities to take advantage of that private information. The Securities a
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nd Exchange Commission is responsible for protecting markets against insider trading. In the past, peopl
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e have gone to jail for trading on non-
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public information. This has included company officers, investment bankers, printers who have inform
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ation before it is published, and even truck drivers who deliver business magazines and read positive or n
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egative articles about a company before the magazine is on the newsstands and then place trades or have f
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riends place trades based on that information. The SEC has prosecuted anyone who profits from inside i
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nformation.
1-10 In terms of the life of the securities offered, what is the difference between money and capital market
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s?
Money markets refer to those markets dealing with short- sc sc sc sc sc sc sc sc
term securities that have a life of one year or less. Capital markets refer to securities with a life of more t
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han one year. sc sc
1-11 What is the difference between a primary and a secondary market?
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